World Wide - Why was Mr. Hackman able to reduce the price? How did he know that a reduction was possible? Did Mr. Hackman treat Ms. Baxter fairly?

WORLD-WIDE INDUSTRIES Alice Baxter recently joined the supply department of World-Wide Industries (WWI). Alice had been a supply manager in a machine shop in the nearby town of Clarence. While at the machine shop, she completed her MBA degree with a major in supply chain management. Her new job with WWI resulted in a handsome increase in salary and a great potential for promotion. Alice’s first assignment at WWI was supply manager for all purchased components for WWI’s line of power mowers. Alice’s new boss and the individual responsible for hiring her was Gayton Hackman, the supply manager. Alice received as her first major buying assignment the purchase of a metal housing for a 19-inch power mower. Her previous experience had given her a familiarity with drawings and specifications, particularly as they were related to sheet metal work. She was not disturbed at all by the magnitude of the assignment. It involved not only a high-priced assembly, but also a major investment in tools. Alice requested advice from Mr. Hackman as to those sources that could fabricate the housing at low cost. Mr. Hackman gave her the names, addresses, and contacts for four companies currently in the business of manufacturing this type of product, and recommended that they be sent drawings and specifications. On receipt of the drawings, all the potential suppliers visited Miss Baxter to make sure that all the details were understood and to offer helpful suggestions as to ways in which the housing could be made at a lower cost. In the meetings that ensued, both Miss Baxter and Mr. Hackman discussed the details with the suppliers and the design engineer. At that time it was pointed out very clearly by Miss Baxter that this housing purchase was highly competitive, that other sources were also quoting on the same drawings and specifications, and that the power mower was a low-profit-margin item. Accordingly, the company was forced to make every conceivable effort by negotiation of design and price to purchase the housing at the rock-bottom price. She also pointed out that there would be substantial volume over a period of twelve to eighteen months, which should make the business very attractive. In a few days following these separate meetings, quotations were received from the suppliers. Miss Baxter carefully reviewed them, with the resultant determination on her part to place the business with the lowest bidder who apparently would meet all the drawing and specification requirements. The low bidder, the Troy Iron Works, quoted $19.56. The next lowest bidder, the Tipton Machine Company, quoted $19.80. The other two companies were over $21.00 and were not given any consideration by Miss Baxter. In the course of a discussion about the placement of this business, Miss Baxter was quite surprised to find that Mr. Hackman did not consider that the business was ready for placement. He contended that the price of $19.56 was too high, and that the business should really be placed with the Tipton Machine Company. Miss Baxter argued with Mr. Hackman that, inasmuch as the suppliers had been told that they must bid at the lowest possible price, they had negotiated out all of the design features possible. The price must be right. She saw no reason for procrastination or further discussion. Mr. Hack-man, on the other hand, calmly stated that they were now in a position for the first time really to negotiate the purchase and that Miss Baxter should go back to the low bidders and tell them that their prices were too high and that they should submit new quotations. Miss Baxter stated that she was of the opinion that this was unfair to the Troy Iron Works. She felt the quotations were already based on the suppliers making a fair profit and that such a quotation might injure their opportunity to negotiate further business with these suppliers. Mr. Hackman agreed that any company that does not receive the business is apt to be unhappy regardless of the circumstances, but he would not agree that the question of profit should concern the buying firm. After all, no consideration was being given to the profitability of the power mower, which had already been clearly defined as marginal. Mr. Hackman further explained to Miss Baxter that it was highly desirable for the business to be placed with the Tipton Machine Company as the Troy Iron Works was already making all the other mower housings. Unless the company provided some split of the business, it would lose its negotiating effectiveness for future business (it being accepted by the suppliers that no one but the Troy Iron Works could get business from World-Wide Industries). Mr. Hackman further explained that the company was not in a position to pay Tipton more than Troy and that the negotiations should be conducted to ensure not only that Tipton Machine Company received the business but that it was the low bidder. The degree of determination on the part of Mr. Hackman that this must be true, and the lack of acceptance by Miss Baxter of the fact that it either could or should be done, resulted in Mr. Hackman taking over the completion of the negotiations with both the Troy and Tipton companies. The net result of this second-look negotiation was that the business was placed with the Tipton Machine Company at a price of $18.60. The initial and revised bids are as follows: Initial bid Second bid Change Troy Iron Works $19.56 $18.75 –$0.81 Tipton Machine Co. $19.80 $18.60 –$1.20 Miss Baxter was very upset on two counts: Her supervisor had proved that additional costs could be taken out of the part, and supplier relations had apparently not been damaged or disturbed. 

1. Why was Mr. Hackman able to reduce the price? How did he know that a reduction was possible? 

2. Did Mr. Hackman treat Miss Baxter fairly? 

3. Can this type of buying approach be broadly applied to all commodities and industries? 

4. Do you believe that either Miss Baxter or Mr. Hackman was right in disregarding the high initial bids submitted by the third and fourth companies? 

5. Were supplier relations damaged or disturbed?

Answer rating: 100% (QA)

1 Mr Hackman was able to reduce the price because the suppliers were willing to negotiate on the price He knew that a reduction was possible because t... View the full answer